Reforming the Company |
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REFORM OBJECTIVES, GOALS, AND PHASES |
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The goals and objectives of the electricity reform were defined in Regulation No. 526 of the Russian Government of 11 July 2001 On Reforming the Electricity Industry in the Russian Federation and were set out in more detail in the Strategy Concept of OAO RAO "UES of Russia" for 2003-2008 "5+5". GOALS AND OBJECTIVES OF THE REFORM The goals of the electricity reform were dictated by the needs of the national economy and the energy sector itself, i.e. the economic growth accompanied with a steady increase in the demand for electricity after 1999, ageing of the energy companies' assets and the prospect of facing electricity deficit. In order to ensure reliable energy supply to industrial and household users, it was necessary to attract investments in amounts which could not be allocated from the state budget or covered by tariffs. However, it was impossible to attract private investments without changing the principal rules of play in the electricity industry, that is, without creating a competitive environment and efficient market relations, without strengthening government control over the natural monopoly sections of the electricity industry. For that purpose, it was necessary to unbundle the vertically-integrated regional energos enjoying a monopoly position and create large companies engaged in particular line of business. The reform of the electricity industry started in 2001 when the Russian Government issued Resolution No. 526 determining the key aspects and phases of the reform. Among the top-priority goals of the reform was development of the regulatory framework for the reform, corporate restructuring and creation of wholesale and retail liberalized markets for electricity. REGULATORY FRAMEWORK The fundamental legal acts determining the main avenues for the reform were Federal Laws No. 35 On the Electric Power Industry and No. 36 On Peculiarities of Functioning of the Electric Power Industry During the Transitional Period, dated 26 March 2003. The regulatory framework for the electricity reform is comprised of 9 Federal Laws, 26 Orders and 9 Directives of the Russian Government, and over 30 orders issued by the Ministry of Industry and Energy and the Federal Tariffs Service of Russia. The regulatory framework for the reform and functioning of the electricity industry created over the past seven years made it possible to establish the intended sector structure and switch to the market-based methods of running the sector while stepping up the investment process. In December 2007, amendments to the Federal Laws were adopted which laid the basis for the operation of the electricity industry after the transitional phase of the reform is completed. These amendments fix the date for the termination of the transitional period on 1 July 2008, on which the reorganization of OAO RAO "UES of Russia" will be completed. It separately defines the terms for the termination of the transitional market on the electricity market and provides for the establishment of a self-regulatory organization (the Market Council) and a commercial system operator of the wholesale market. The amendments also lay down the principles for industry oversight by government authorities, infrastructural and self-regulatory entities, with special emphasis laid on preventing abuse of monopoly position by energy companies. Among other important changes adopted were the revised principles of setting the tariffs, action to improve reliability of electricity supply to customers, and introduction of the notion of "capacity" as a commodity. The list of important regulations adopted in 2007 includes Resolution No. 205 of the Russian Government dated 7 April 2007 On Making Amendments to Some Regulations of the Russian Federation Government on the Question of Determining the Volumes of Electricity Sold at Free (Unregulated) Prices, which determined the timeframe and phases for the liberalization of electricity markets. RESTRUCTURING In order to create a competitive environment in the electricity industry, it was necessary to drastically change the sector structure. The key goal of such restructuring was functional unbundling of the vertically-integrated regional energy companies (regional energos) to be followed by establishment of large interregional integrated generation companies and grid companies which would have a greater potential for raising investments. The Board of Directors of RAO "UES of Russia" approved the reform plans for all 72 regional energos. Of these, 50 plans use the "basic scheme", while 22 are based on ad-hoc schemes. 68 regional energos completed the official registration of their spin-off companies, with the unbundling process completed at 67 regional energos. As a result, 266 new companies were established. By now, the generation assets have been consolidated into two kinds of interregional companies, wholesale generation companies (WGCs) and territorial generation companies (TGCs), which are comparable in terms of size and efficiency of the assets comprising them. The WGCs comprise the power plants engaged in the generation of electricity alone. TGCs most comprise combined heat and power plants (CHPPs) which produce both electricity and heat. Six out of the seven WGCs were created on the basis of thermal power plants, and one WGC (HydroWGC) on the basis of hydropower plants. The thermal-based WGCs are built on an exterritorial basis while the TGCs unite the power plants located in neighbouring regions. It is safe to say that by end-2007, the restructuring was largely completed. The process to create all thermal-based generation companies—6 WGCs and 14 TGCs —had been accomplished, and the consolidation of HydroWGC is nearing completion. The bulk transmission assets (trunk grids) spun off from regional energos are to be transferred to Federal Grid Company. Pursuant to the Resolution of the Russian Government changing the configuration of the IDCs, seven out of eleven interregional distribution companies were consolidated, and the remaining IDCs continued the process to consolidate their assets. The energy assets owned by the companies based in the Far East of Russia and those of the island energy systems, which cannot participate in the operation of competitive markets for electricity and capacity for technological reasons, will be consolidated in a holding company, OAO "RAO Energy Systems of the East". The retail, R&M and services companies spun off from regional energos in the unbundling process are to be sold to private investors. In 2007, RAO "UES of Russia" sold its stakes in 22 energy retail companies. In 2001, Not-for-profit Partnership "Administrator of Trading System of the Wholesale Electricity Market of the Unified Energy System" (NP "ATS") was established to perform the function of trading and settlement provider on the wholesale electricity (capacity) market. In 2008, the functions of trading organizer will be transferred, pursuant to the Amended Law On the Electric Power Industry, from NP "ATS" to the Partnership's wholly-owned subsidiary, OAO "ATS", which will act as a commercial operator of the wholesale market. By 2007, the infrastructure companies had largely completed their establishment. In 2002, OAO "Federal Grid Company of the Unified Energy System" (OAO "FGC UES") was established to manage and operate the country's bulk transmission grids. In June 2002, OAO "UES SO-CDA" was registered with the authorities. In February 2008, the company changed its name to OAO "System Operator of the Unified Energy System" (OAO "SO UES"). System Operator is the top level of the dispatching system in the electricity industry. The functions and assets of the regional dispatching administrations (RDAs) were transferred to System Operator (OAO "SO UES") which will create its branches, RDAs, on their basis. In 2007, the state increased its stake in OAO "SO UES" to 30 percent. As a result of its additional share issue carried out in March 2007, OAO "FGC UES" received the shares owned by RAO "UES of Russia" in 42 transmission (trunk grid) companies and cash in the total amount of about RUB59 billion, with the interest held by the Russian Federation in the FGC's capital increasing to 12.44 percent. As a result of the second additional share issue, OAO "FGC UES" received the shares held by RAO "UES of Russia" in another eight transmission (trunk grid) companies, as well as shares in OAO "NTC Electroenergetiki" and AO UES "GruzRosenergo". It is expected that transmission (trunk grid) companies (TCs) and interregional transmission (trunk grid) companies (ITCs) will merge with and into OAO "FGC UES" (such merger will be structured as a one-step transaction) simultaneously with the completion of the final phase of reorganization of RAO "UES of Russia". THE TARGET STRUCTURE OF ELECTRIC POWER SECTOR AFTER REFORM COMPLETION
ELECTRICITY MARKET REFORM The reform of the wholesale electricity (capacity) market of the transitional period was launched after the Russian Government approved the Rules for the Wholesale Electricity (Capacity) Market for the Transitional Period (Resolution No. 643 dated 24 October 2003). On 1 November 2003, the "5-15" competitive trading segment of the wholesale electricity market was launched in the European part of Russia and the Urals area, and the wholesale electricity market in Siberia started its operations on 1 May 2005. The balancing market was inaugurated in October 2005. In September 2006, in accordance with Russian Government Resolutions 529 and 530, dated 31 August 2006, the new rules for the operation of the wholesale electricity (capacity) market and retail electricity market were introduced. The new electricity market rules provide for:
Thus, by 2007, the new wholesale electricity (capacity) market consisted of several segments:
Furthermore, the wholesale market has a system of bilateral agreements which consists of:
2008 is expected to see the launch of the capacity market. It is also planned that the following markets will be created: a market for ancillary services, a market for electricity transmission capacity rights in respect of limited sections, and the market for energy derivatives. TRANSITION FROM THE ELECTRI CITY AND CAPACITY MARKET OF THE TRANSITIONAL PERIOD TO THE TARGET MODEL
INVESTMENT PHASE OF THE REFORM The restructuring and establishment of market relations in the sector paved the way for large-scale investments needed for the development of Russia's electricity industry. The sources of investment correspond to the sector's ownership structure. Private investments are the principal source of finance for investment projects in the competitive segment (chiefly in the thermal generation business), while the state provides financing for the natural monopolies—transmission grids and hydropower generation. The first project to raise private investment in generation companies—the additional share offering of OAO "WGC-5"—was implemented in November 2006. The offering proceeds amounted to approximately RUB12 billion. The success in this pilot project made it possible to launch a large-scale campaign in 2007 to attract investment in the electricity industry through issuance of additional shares and sale of the generation companies' shares owned by RAO "UES of Russia". In 2007, additional share offerings were successfully implemented by OAO "WGC-2", OAO "WGC-3", OAO "WGC-4", OAO "WGC-6", OAO "TGC-1", OAO "Mosenergo" (TGC-3), OAO "TGC-5", OAO "SGC TGC-8", OAO "TGC-9", and OAO "Kuzbassenergo" (TGC-12). The proceeds from the generation companies' share issues (taking into the WGC-5 offering) totalled in excess of RUB322 billion. The aggregate amount of funds raised by the energy companies from the additional share offerings and sale of the generation companies' shares held by RAO "UES of Russia" made nearly RUB611.5 billion as of end-2007. All these funds were earmarked to finance the companies' investment programmes. The proceeds from the WGC/TGC offerings will be used for the construction of new generation units. The funds received from the sale of the "government-stake" shares in the generation companies held by RAO "UES of Russia" will go towards financing the construction of the UNEG facilities and hydropower capacity. |
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